Market Process Of The Municipal Bond Credit Risk Control

With the further reform of fiscal decentralization system, rapid development of city construction and gradually evolution of capital market, it become more and more necessary to open and develop the municipal market in China. Under this circumstance, it is obviously meaningful to study on the municipal bonds.A number of studies have identified the necessary of issuing municipal bonds in China. Some have simply discussed the criterion of establishing China municipal bond market. However, the study of the risk control mechanism for municipal bonds is inadequate. Therefore, this paper conceives a two-level framework to study the credit risk control of the municipal bonds in China, with the hypothesis of China has already established a municipal bond market.Using the framework, this paper systematically introduces the concept of municipal bonds, summarizes and discusses the theories of public debt, public goods and fiscal decentralization, analyzes the credit risk of municipal bonds, points out the importance of studying the credit risk control problem of the municipal bonds in China, and then introduces the operating mechanism of modern KMV Credit Monitor Model. On the basis of the theory, this paper constructed the credit risk valuation model for municipal bonds by borrowing the methodology of KMV model and Han, Zheng & Luo's (2003) default risk model. When applying the mode to Zhejiang's case, this paper computes the expected default probabilities corresponding to different possible issue volumes of municipal bonds in Hangzhou and Ningbo (two cities in Zhejiang province) respectively, both under the assumption of normal distribution / logarithm normal distribution hypothesis. The results show the safe issue volume of municipal bonds both in the two cities respectively. In addition, this paper also analyzes the financial power of all the eleven cities in Zhejiang province through clustering analysis, before estimating the credit risk for municipal bonds in Hangzhou and Ningbo's cases, in order to identify the cities' firstly issue possibility of municipal bonds. Besides of the technical valuation method, this paper also suggested the advices of building the credit risk control system, which includes the credit rating system, system of information disclosure and system of insurance on municipal bonds. Finally, suggestions are put forward to provide some method and ideas for the future research.